Wednesday, July 06, 2011

It’s a familiar and frequently-told narrative that middle-class incomes have stagnated over the last several generations while the upper-income groups have gotten richer. President Obama has promoted this narrative by claiming in 2009 that “For many years, middle class Americans have been working harder, yet not enjoying their fair share of the fruits of a growing economy."

But a new working paper titled “A "Second Opinion" on the Economic Health of the American Middle Class” by NBER and Cornell researchers provides new evidence that the popular narrative is largely mistaken. By taking into account previously unmeasured shifts in household size and the tax units in them, taxes paid, transfer payments received, and the increasing importance of fringe benefits, the researchers find that the growth in after-tax household income has been substantial not only for the middle class, but for all income groups over the last 30 years.

From the paper:

“The median pre-tax pre-transfer income of all tax units (filers and non-filers) only increased by 3.2% in real terms over the entire period between 1979 and 2007. These results are consistent with the view that the typical American has not gained much from economic growth over the last 30 years.

But when we broaden the sharing unit to the household, account for economies of scale in household consumption, and recognize that the payment of taxes or the receipt of tax credits as well as government transfer income and in-kind benefits all impact the economic resources available to individuals, we find the story changes. Specifically, when using our broadest measure of available resources—post-tax, post-transfer size-adjusted household income including the value of in-kind health insurance benefits—median income growth of individual Americans improves to 36.7% over the period from 1979 and 2007.

The table above illustrates the change in income for each income quintile over the entire 29 year period. Importantly, in contrast to tax unit market income measures of income where the bottom two quintiles get poorer (first column of data) and only the top quintile gets noticeably richer, each of the other series shows income growth throughout the distribution. Once taxes and health insurance are taken into account, each of the quintiles of the distribution are shown to have sizable growth over the 29 year period - with the slowest growth being a 26.4% increase in mean incomes for the bottom quintile of the distribution (last column). Growth in the middle quintile is 36.9%, dramatically greater than their 2.2% growth in private market income when measured at the tax unit level."

Conclusion: "These more inclusive measures of access to economic resources suggest that income inequality increased in the United States not because the rich got richer, the poor got poorer and the middle class stagnated, but because the rich got richer at a faster rate than the middle and poorer quintiles and this mostly occurred in the 1980s. Growth was substantial in all quintiles once the influence of government tax and transfer policy as well as the shift in compensation from wages to health insurance provided by employers and the shift to increased in-kind health insurance by government is more full recognized.

MP: The findings in this paper provide strong, empirical evidence contrary to the middle-class stagnation story, and in fact show that over the last thirty years "the rich got richer and the poor got richer" after making adjustments for household composition, taxes, transfer payments and fringe benefits to measure "access to economic resources."

I agree with PeakTrader. Basically government assistance is the only thing responsible for the bottom fifth having any gains at all.

Basically, what has happened in the time period we are talking about is that the supply of unskilled and semi-skilled labor has increased by many orders of magnitudes as the developing world has opened itself up to economic development. This is a good thing. But that also means the "price" of unskilled and semi-skilled labor has also fallen.

So, I don't think that the fall in the real wages of the unskilled workers is some sort of a conspiracy. It's a natural development as the developing world has embraced capitalism to some extent over the last 30 years. But since I am a practical free market capitalist, I know that the bottom half won't just accept that their wage earning powers have deteriorated. And if we don't placate them somehow the will elect people who will make Obama look like Reagan.

Therefore, this NBER study just suggests for more subsidies for low wage workers. It is only those subsidies that have made the "poor get richer" as Mark Perry states.

"peak trader: So, it seems, without government assistance, roughly the bottom third would've had a real decline in living standards."

No, sir. All this study shows is that government transfers now account for a significant part of today's income of the bottom third. It says nothing about what would have happened had those government transfers not been available.

IMO, if government transfers had not been available:

1. the incentives to work would be much greater, and many who have been underemployed by choice would be more productive;

2. the removal of incentives for having children would result in more widespread use of birth control by poor young females;

3. the incentives for couples to stay together in a household would be greater, resulting in fewer single parent households.

In the economics classes I took, both at the University of Houston and the University of Pennsylvania, we learned that incentives matter. Did you not learn that simple concept when you acquired your two degrees in economics?

Jet Beagle, take away government assistance and there's more unskilled labor, which means more competition and lower wages.

Do you live on earth, Peak? I understand the temptation to think that since you have managed to learn nothing over your lifetime that others don't either, but that's not true.

When low-skilled people begin to work, they begin to acquire skills. Valuable skills. Skills that others will pay for. Thus, the initially low skilled eventually become skilled.

If you view a $10 minimum wage as necessary, then by all means, start a company and pay as much as you want. It's your money (although, I noticed you're not doing that). But stop stomping on the efforts of the poor to rise out of poverty.

is also of some significance when looking at the couple filing a joint tax return and earning $250K. They may be in the top 2% on a pre-tax, pre-benefit basis, but not on an after-tax, after-benefit basis.

The government quintile studies are disinformation used to bolster the case for more and more socialism. The table provided in this story shows step by step how adjusting for reality destroys the claims. All 5 quintiles are growing income. Those doing the most work are prospering most. Sounds good to me.

"Jet Beagle, take away government assistance and there's more unskilled labor, which means more competition and lower wages"

that's only half the equation.

a large pool of willing and inexpensive labor promotes corporate formation and manufacturing. that creates jobs.

so do the lower taxes we'd pay if we were not supporting a social net which would leave more money for personal expenditure and investment, both personal and corporate.

those both drive growth and job creation as well.

this pushes wages up.

you are only looking at one half of the story.

further, you are missing some additional aspects of the issue:

1. leaving more wealth in private hands leads to more growth. the same % of a bigger pie is still more.

2. this is enormously increased by forcing people to be productive. a layabout may prefer to get welfare and not work, but that costs someone else their job. the money comes from somewhere. if that same person were working, they would be producing output, not destroying it

MP: The findings in this paper provide strong, empirical evidence contrary to the middle-class stagnation story, and in fact show that over the last thirty years "the rich got richer and the poor got richer" after making adjustments for household composition, taxes, transfer payments and fringe benefits to measure "access to economic resources."

How exactly does the paper handle the accrued liabilities to each household again? When looking at how well people are doing it helps to take into account both the balance sheet and the income statements. And when looking at the balance sheet you need to look at the assets AND the liabilities. What that assessment is done things are not as you try to make them out to be.

I agree with PeakTrader. Basically government assistance is the only thing responsible for the bottom fifth having any gains at all.

I do not believe that this is true. Most of the households that made up the bottom fifth in 1979 are unlikely to be in the same quintile. Their income level today is likely to be diminished due to the redistribution programs that they are now funding.

Yes, China created millions of $0.25 an hour jobs and a billionaire class.

But the after-tax $0.25 an hour jobs often came with housing, utilities, health care, meals, etc. The savings allowed workers to build their own homes or send money to family members for the purpose of starting their own businesses. And by the way, eight years ago I could buy myself a glass of decent beer and lunch for $0.25.

Yes, but the bottom fifth didn't disappear between 1979 and 2009. They just got a lot poorer without government assistance.

Hell no. Like the Jeffersons, most of them moved on up. It is only those that have become dependent on transfer payments who are likely still where they were. Here is a table from a previous commentary that shows that 44% of the first quintile had moved up just between 2001 and 2007. Note that 34% of the top quintile managed to move down.

VangelV, I didn't say there wasn't income mobility. I said without government assistance, the bottom third in 2009 were poorer than the bottom third in 1979 (the composition of the bottom third has changed).

Ron, in a globalized world and in the free market, low-skilled U.S. wages will converge with low-skilled foreign wages.

They won't reach $1 in Mexico or $0.25 in China, but they'll fall. Also, without government assistance, employment will rise.

"Ron, in a globalized world and in the free market, low-skilled U.S. wages will converge with low-skilled foreign wages. "

I think it's the other way around. As foreign producers employ more capital per employee, foreign workers wages will rise to converge with US wages. With equal capital/worker and equal skills, I would expect equivalent wages.

Higher foreign wages will produce higher demand. We have seen something like this happen in Japan.

I think that the story is very clear. Those supposedly exploited workers wound up making enough money to buy homes and businesses as Nike, Columbia, and other 'exploiters' allowed them to escape the crushing poverty of the countryside.

I think it's the other way around. As foreign producers employ more capital per employee, foreign workers wages will rise to converge with US wages. With equal capital/worker and equal skills, I would expect equivalent wages.

Not in PeakWorld, Ron H.

In PeakWorld, the poor get poorer as demand for labour increases. The only way to fix that is by raising the minimum wage so as to make them unemployable.

Having accomplished that task, you must then complain that the rich get richer and the poor get poorer. The obvious solution is to attach the now completely unemployable poor to the government teet (paid for by the rich who are getting richer).

Then, as inflation works its magic on the non-pegged minimum wage and the previously unemployable become employable, you obviously need to raise the minimum wage again to slam the least fortunate back to the humiliation of sucking on the government teet. Because, after all, without wealth transfers to poor, the poor would just starve to death. Obviously.

"Methinks: In PeakWorld, the poor get poorer as demand for labour increases. The only way to fix that is by raising the minimum wage so as to make them unemployable."

That's really weird. I own a book by H. Hazlitt, with the same title you attribute to Peak, and I don't remember reading anything like this. Is my copy missing a chapter or something? Perhaps the chapter on Peakonomics?

It IS a really small book, and I recall that when I finished reading it, I felt let down, because I wanted more. As I read it, I felt as though I was climbing up out of a thick fog into a bright, clear day.

I think everyone on the planet should own a copy of "Economics In One Lesson".

In fact, I would almost - that's almost - agree to a one time redistribution of income to make that happen.

After all, If everyone read Hazlitt, any further mention of redistribution would be met with gales of laughter.

LOL! I was just thinking about that as I was reading your Hazlitt post.

It gives me great comfort to know my mind works something like yours :)

I was listening to Bloomberg and Fox this morning and heard commentators calling for QE3 because they were worried about the 'short term.' The more I listened the worse it seemed for the economy because the idiots really thought that destroying the USD was a good idea.

"I was listening to Bloomberg and Fox this morning and heard commentators calling for QE3 because they were worried about the 'short term.' The more I listened the worse it seemed for the economy because the idiots really thought that destroying the USD was a good idea."

They truly don't understand, and believe that politicians and bureaucrats know what they are talking about. It's really scary.

Methinks & I have a plan to drop copies of Hazlitt's "Economics In One Lesson" on every school econ dept, but there might be more urgent, immediate targets at radio and TV stations. We won't be flying over DC, as that would be a waste of books.

The Cornell group’s research is about something completely different than what the economist studied. The economist study looked at an individual's income alone. The Cornell study looked at the total income of a house hold no matter how many people contributed to it. See the funny math coming to light? You are saying that each person who earns an income will be counted as one because they share the same address. So if you have 10 people sharing a house because they can’t afford to live alone, they are treated as one earner because they share the same address. This is a nice way to hide the real statistic which is each and every person is NOT earning a middle class living. Using a house hold that contains many earners as a unit of measure that is equal to a hold that contains one earner is silly. I guess funny math is the only way Republicans can justify the results of trickledown economics.